MFA Financial, Inc. — Q2 2020 Form 10-Q
Business context and period. MFA is a leveraged residential mortgage REIT. This unaudited filing covers the quarter and six months ended June 30, 2020. COVID-19 market disruption triggered lender margin calls, asset sales, a period of lender forbearance, and a major refinancing and portfolio restructuring.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $87.4 million | $144.9 million | $232.8 million | $285.9 million |
| Interest expense | $88.0 million | $85.0 million | $171.8 million | $164.1 million |
| Net interest income/(expense) | ($0.6 million) | $59.9 million | $61.1 million | $121.8 million |
| Net income/(loss) | $96.6 million | $93.0 million | ($812.4 million) | $181.9 million |
| EPS, diluted | $0.19 | $0.20 | ($1.82) | $0.38 |
- Q2 net interest margin was 0.02%, versus 2.29% a year earlier; the six-month margin was 1.40%, versus 2.35%. Q2 funding costs rose sharply during forbearance, and asset sales reduced interest-earning investments.
- Six-month operating cash flow was $56.6 million. Investing activities provided $5.4 billion, financing activities used $4.9 billion, and cash, cash equivalents and restricted cash increased $539.2 million.
- At June 30, total assets were $7.57 billion, total liabilities $5.05 billion and stockholders’ equity $2.52 billion. Cash and cash equivalents were $666.2 million; restricted cash was $7.7 million. Management reported available liquidity above $720.9 million, including $54.7 million of unused financing capacity, and $58.8 million of unencumbered residential whole loans.
- Financing agreements totaled $5.01 billion, including $3.69 billion of asset-backed financing, $516.1 million of securitized debt, a $481.0 million secured term loan, and unsecured notes. Debt-to-equity was approximately 2.0:1, down from 3.0:1 at year-end 2019. Management said approximately 65% of debt financing was longer-term, non-mark-to-market debt.
- GAAP book value per common share was $4.51, up from $4.34 at March 31; economic book value, a non-GAAP measure, was $4.46, up from $4.09.
Material changes and unusual items
- MFA sold its remaining Agency MBS and substantially all Legacy Non-Agency MBS, and reduced its MSR-related assets and CRT securities. Residential whole loans became its primary investment asset. Total assets declined from $13.57 billion at December 31, 2019 to $7.57 billion at June 30, 2020.
- First-half results included $424.7 million of impairment and other losses, $188.9 million of net realized losses on asset sales, and a $49.9 million loss transferred from accumulated other comprehensive income for terminated swaps. These items, along with credit-loss provisioning and fair-value changes, drove the six-month net loss.
- Q2 included $76.4 million of net other income and $64.5 million of operating and other expense, including $40.0 million of costs associated with lender negotiations and financing changes. The quarter also benefited from an $85.4 million reversal of credit and valuation losses; management attributed $70.2 million to loans sold and $15.2 million primarily to revised economic assumptions.
- MFA adopted CECL on January 1, 2020. Its allowance for credit losses on residential whole loans at carrying value was $136.6 million at June 30; the company said pandemic-related unemployment and weaker conditions raised expected losses, although its view of their severity moderated slightly during Q2.
Outlook, risks and contingencies
- On June 26, MFA completed a $500 million secured term loan and new or renegotiated asset-backed facilities, including approximately $1.6 billion of non-mark-to-market financing and approximately $475 million of additional facilities. It reported satisfying outstanding margin calls and exiting lender forbearance. The secured loan carries an initial 11% annual rate, scheduled principal payments and financial and other covenants.
- The financing agreement and related investment agreement included warrants for 37,039,106 common shares, exercisable at $1.66 or $2.08 per share, creating potential dilution.
- COVID-19 remains a key uncertainty. Forbearance plans covered approximately 21.4% of loans at carrying value and 17.2% of loans at fair value. Some borrowers had not resumed payments, and certain loans classified as current at quarter-end could become delinquent or non-accrual later. Residential whole loans were the company’s principal credit exposure.
- Other key risks include renewed margin calls, financing renewal and counterparty risk, interest-rate and spread movements, prepayments, borrower defaults, collateral values, and forecast-sensitive CECL estimates. MFA had unwound all swaps in Q1; it reported no swaps outstanding at June 30.
- The filing gives no formal earnings guidance and cautions that interim results are not necessarily indicative of full-year results. MFA suspended common and preferred dividends during the liquidity crisis; preferred dividends were reinstated and arrears paid in July. In August, it declared a $0.05-per-share common dividend payable October 30, 2020.
- At June 30, the company reported no reserve for loan-securitization repurchases and no known material unsettled repurchase claims; it reported no material pending legal proceedings. Unfunded commitments included $94.5 million for rehabilitation loans and corporate loan commitments of which approximately $106.8 million of $150.0 million was drawn.
Important facts for investors to verify
- Whether liquidity, covenant compliance and access to financing remain adequate if collateral values weaken or lenders tighten terms.
- Loan performance after pandemic forbearance, including delinquencies, non-accruals, foreclosures and future CECL allowance changes.
- The sustainability of earnings after the unusually large asset sales, fair-value movements, credit-loss reversals and financing-related costs.
- The terms and potential dilution from the warrants, and the company’s ability to meet secured-loan amortization and interest costs.
- Whether reinstated dividends are supportable by taxable income, cash generation and liquidity; reported GAAP earnings and REIT taxable income can differ materially.